The $12.1 million per year payment, frozen for three years, helps the city stay solvent.

Lakeland Regional Medical Center is about to see the end of a three-year freeze on its lease payment to the city of Lakeland, and hospital officials worry that an increase in the payment could affect the hospital's ability to borrow money at low interest rates.

Published: Wednesday, July 23, 2014 at 12:01 a.m.

Last Modified: Thursday, July 24, 2014 at 12:36 a.m.

LAKELAND | A three-year freeze on Lakeland Regional Medical Center's annual lease payment to the city of Lakeland ends this year.

That brings the issue of how much the hospital can afford to pay, without compromising quality, to a City Commission in need of more money.

When Elaine Thompson came to Lakeland Regional in 2010, she announced her determination to move it into the top 10 percent nationwide.

The cost of its lease payment is a major obstacle in achieving that, said Thompson, chief executive officer of LRMC and president-CEO of its parent company, Lakeland Regional Health System.

"Every year, we take $12.1 million out of taking care of sick people," Thompson said. "We have pleaded with them (commissioners) not to increase it anymore. It adds to the fragility of the hospital."

The lease payment to the city rose from $1.7 million in 1987 to $12.1 million per year for this year and the past two.

It would have risen to $13.6 million this year if city officials hadn't agreed in 2011 to the three-year freeze, said Jack Harrell Jr., chairman of the hospital's board of directors. The payment is a financial drain, threatening their ability to stay competitive and hampering efforts to improve, he and Thompson said.

They said they initially hoped the city would work with LRMC this year to reduce its payments.

Instead, with the city facing an expected $7.5 million shortfall, the board reverted to asking the commission to keep the annual lease payment at $12.1 million per year for another five years.

In a letter Friday to city officials, board members asked again for "a sincere beginning of a dialogue on how a meaningful de-escalation of the lease payment can begin," with a goal of lease payments similar to others statewide.

The city may not cooperate. Officials have depended for years on the lease payment and profit from Lakeland Electric to keep taxes lower than they would be otherwise.

Lakeland Mayor Howard Wiggs said it's "way too early" to know what the commission will do about LRMC's lease.

"There are so many variables," he said, among them whether to increase the dividend Lakeland Electric pays the city, have a fire assessment fee and/or raise taxes.

"We're advertising a 2-mill potential (tax) increase," Wiggs said.

"It's very unlikely we will do that, but we have to advertise how much we could go up."

LRMC's lease and the other issues need to be discussed in a public meeting, he said.

"It's a very delicate balance," Commissioner Justin Troller said. "These are discussions that will take place in the next few weeks."

Although it would be nice to be able to do away with the lease, he said, the community "has come to be dependent on it."

Once used mostly for things like enhancing parks and recreation, some of the lease payment now subsidizes the city's general revenue. Thompson, Harrell and others from LRMC have met one-on-one with commissioners about their concerns. Chief among them is fear that the hospital's rating from Moody's Investors Service will decline if lease payments aren't controlled.

The danger of a lower rating would make it more expensive for the hospital to get financing. Its officials say they plan to borrow $150 million in the coming fiscal year for major building projects.

Its facilities are aging, with an average age of 14.3 years, which is below the median average of 10.3 years at other hospitals with the rating Moody's gives Lakeland.

It would take an immediate investment of $140 million to bring the age of the buildings and equipment up to the average, Moody's said.

The tight economy increased the percentage of Lakeland Regional's patients who are on Medicaid, Moody's said, and the county's per capita income and property values are below national and state averages.

Those both affect the hospital's financial strength.

Lakeland Regional also stands to lose $8 million to $10 million in government funds it now receives that help offset the cost of low-income, uninsured patients, Harrell said.

That match, done in collaboration with the Polk County indigent-care program, is expected to end in another year, they said.

Lakeland Regional also expects increased competition from BayCare Health System, which owns Winter Haven Hospital to the east and South Florida Baptist Hospital to the west in Plant City.

Lakeland Regional's lease payment is well above those paid by other hospitals in Florida. The second-highest they have found is the approximately $500,000 paid by Lake Shore Hospital in Columbia County, Thompson said.

Sebring Hospital Management Associates pays $320,000 per year to Highlands County. Tampa General Hospital, one of the nationally ranked hospitals with which LRMC competes, pays Hillsborough County $10 per year, she said. Moody's threatened to lower Lakeland Regional's financial rating three years ago, but the lease payment freeze and cost-cutting efforts at Lakeland Regional prevented it.

In a meeting with The Ledger on Tuesday, hospital officials said they reduced their average expense per patient by 15 percent to 20 percent.

LRMC isn't at death's door.

It has a stable outlook and an A2 long-term rating from Moody's, which essentially means it's in satisfactory financial shape now. But Moody's sees several challenges for Polk County's largest hospital. Highly elevated lease payments that the hospital can't absorb could contribute to lowering its rating, Moody's said last August.

Added to that and the aging buildings, Moody's mentions the hospital's "co-dependence" with Watson Clinic as one of its primary credit concerns.

The clinic's 260-plus doctors admit about half of the hospital's patients, Moody's said.

Other challenges the Moody's evaluation mentions are "high and increasing" Medicaid impact and a percentage of commercial insurance payers that dropped from 30 percent in fiscal year 2007 to 23.1 percent in June 2013.

Commercial or business insurance rates help cover hospitals' large cost for people who lack insurance or whose coverage doesn't pay the full cost of their care.

Possible financial disruption from the health system's purchase of Clark & Daughtrey and the uncertainty of union contract negotiations are other concerns the evaluation lists.

Thompson said the relationship with Clark & Daughtrey is going very well, although there were costs associated with the change.

One of the building projects planned at LRMC is a proposed eight-story medical tower focused on women's and children's services, surgery and pediatric emergencies.

Moving those into a new building will provide more space for intensive care unit beds and allow the hospital to convert more of its medical-surgical rooms to private.

About half still are semi-private, Thompson said.

Getting three-fourths or more of those rooms to private status isn't a beautification issue, Thompson said, explaining that private rooms are better for infection control.

Newly built hospital rooms can't be semi-private anymore for that reason, she said.

LRMC also has approval to build an in-hospital rehabilitation center on the sixth floor of the existing hospital.

The rehabilitation unit is projected to cost $11.9 million, just under the cost of the annual lease payment.

If the money hadn't gone to the lease payment, supporters point out as an example, it could have funded the new unit. Instead, LRMC needs to get more money from donors, reserves and borrowing.

"Moody's is going to downgrade us someday," warned Hollis Hooks, a broker and former chairman of Lakeland Regional's board.

The lease shouldn't be based on net payment revenue, he said, calling the terms "a hindrance to the financial viability of the hospital."

Net revenue is the money LRMC gets before expenses are subtracted. Hooks said the lease should have been a percentage of revenue LRMC has after meeting its operating expenses. The lease has been a long-standing frustration at the hospital, preceding Thompson's arrival, but the combination of increasing payments unless a freeze continues and the other financial pressures have brought it to a near crisis-level, she and Harrell said.

[ Robin Williams Adams can be reached at robin.adams@theledger.com or 863-802-7558. Read her blog at robinsrx.blogs.theledger.com. Follow on Twitter @ledgerROBIN. ]

<p>LAKELAND | A three-year freeze on Lakeland Regional Medical Center's annual lease payment to the city of Lakeland ends this year.</p><p>That brings the issue of how much the hospital can afford to pay, without compromising quality, to a City Commission in need of more money.</p><p>When Elaine Thompson came to Lakeland Regional in 2010, she announced her determination to move it into the top 10 percent nationwide.</p><p>The cost of its lease payment is a major obstacle in achieving that, said Thompson, chief executive officer of LRMC and president-CEO of its parent company, Lakeland Regional Health System.</p><p>"Every year, we take $12.1 million out of taking care of sick people," Thompson said. "We have pleaded with them (commissioners) not to increase it anymore. It adds to the fragility of the hospital."</p><p>The lease payment to the city rose from $1.7 million in 1987 to $12.1 million per year for this year and the past two.</p><p>It would have risen to $13.6 million this year if city officials hadn't agreed in 2011 to the three-year freeze, said Jack Harrell Jr., chairman of the hospital's board of directors. The payment is a financial drain, threatening their ability to stay competitive and hampering efforts to improve, he and Thompson said.</p><p>They said they initially hoped the city would work with LRMC this year to reduce its payments. </p><p>Instead, with the city facing an expected $7.5 million shortfall, the board reverted to asking the commission to keep the annual lease payment at $12.1 million per year for another five years.</p><p>In a letter Friday to city officials, board members asked again for "a sincere beginning of a dialogue on how a meaningful de-escalation of the lease payment can begin," with a goal of lease payments similar to others statewide.</p><p>The city may not cooperate. Officials have depended for years on the lease payment and profit from Lakeland Electric to keep taxes lower than they would be otherwise.</p><p>Lakeland Mayor Howard Wiggs said it's "way too early" to know what the commission will do about LRMC's lease.</p><p>"There are so many variables," he said, among them whether to increase the dividend Lakeland Electric pays the city, have a fire assessment fee and/or raise taxes.</p><p>"We're advertising a 2-mill potential (tax) increase," Wiggs said. </p><p>"It's very unlikely we will do that, but we have to advertise how much we could go up."</p><p>LRMC's lease and the other issues need to be discussed in a public meeting, he said.</p><p>"It's a very delicate balance," Commissioner Justin Troller said. "These are discussions that will take place in the next few weeks."</p><p>Although it would be nice to be able to do away with the lease, he said, the community "has come to be dependent on it."</p><p>Once used mostly for things like enhancing parks and recreation, some of the lease payment now subsidizes the city's general revenue. Thompson, Harrell and others from LRMC have met one-on-one with commissioners about their concerns. Chief among them is fear that the hospital's rating from Moody's Investors Service will decline if lease payments aren't controlled.</p><p>The danger of a lower rating would make it more expensive for the hospital to get financing. Its officials say they plan to borrow $150 million in the coming fiscal year for major building projects.</p><p>Moody's said the lease payments suppress LRMC's financial performance. </p><p>Its facilities are aging, with an average age of 14.3 years, which is below the median average of 10.3 years at other hospitals with the rating Moody's gives Lakeland.</p><p>It would take an immediate investment of $140 million to bring the age of the buildings and equipment up to the average, Moody's said.</p><p>The tight economy increased the percentage of Lakeland Regional's patients who are on Medicaid, Moody's said, and the county's per capita income and property values are below national and state averages.</p><p>Those both affect the hospital's financial strength. </p><p>Lakeland Regional also stands to lose $8 million to $10 million in government funds it now receives that help offset the cost of low-income, uninsured patients, Harrell said. </p><p>That match, done in collaboration with the Polk County indigent-care program, is expected to end in another year, they said.</p><p>Lakeland Regional also expects increased competition from BayCare Health System, which owns Winter Haven Hospital to the east and South Florida Baptist Hospital to the west in Plant City.</p><p>Lakeland Regional's lease payment is well above those paid by other hospitals in Florida. The second-highest they have found is the approximately $500,000 paid by Lake Shore Hospital in Columbia County, Thompson said.</p><p>Sebring Hospital Management Associates pays $320,000 per year to Highlands County. Tampa General Hospital, one of the nationally ranked hospitals with which LRMC competes, pays Hillsborough County $10 per year, she said. Moody's threatened to lower Lakeland Regional's financial rating three years ago, but the lease payment freeze and cost-cutting efforts at Lakeland Regional prevented it.</p><p>In a meeting with The Ledger on Tuesday, hospital officials said they reduced their average expense per patient by 15 percent to 20 percent.</p><p>LRMC isn't at death's door.</p><p>It has a stable outlook and an A2 long-term rating from Moody's, which essentially means it's in satisfactory financial shape now. But Moody's sees several challenges for Polk County's largest hospital. Highly elevated lease payments that the hospital can't absorb could contribute to lowering its rating, Moody's said last August.</p><p>Added to that and the aging buildings, Moody's mentions the hospital's "co-dependence" with Watson Clinic as one of its primary credit concerns.</p><p>The clinic's 260-plus doctors admit about half of the hospital's patients, Moody's said.</p><p>Other challenges the Moody's evaluation mentions are "high and increasing" Medicaid impact and a percentage of commercial insurance payers that dropped from 30 percent in fiscal year 2007 to 23.1 percent in June 2013.</p><p>Commercial or business insurance rates help cover hospitals' large cost for people who lack insurance or whose coverage doesn't pay the full cost of their care.</p><p>Possible financial disruption from the health system's purchase of Clark & Daughtrey and the uncertainty of union contract negotiations are other concerns the evaluation lists.</p><p>Thompson said the relationship with Clark & Daughtrey is going very well, although there were costs associated with the change.</p><p>One of the building projects planned at LRMC is a proposed eight-story medical tower focused on women's and children's services, surgery and pediatric emergencies.</p><p>Moving those into a new building will provide more space for intensive care unit beds and allow the hospital to convert more of its medical-surgical rooms to private.</p><p>About half still are semi-private, Thompson said.</p><p>Getting three-fourths or more of those rooms to private status isn't a beautification issue, Thompson said, explaining that private rooms are better for infection control.</p><p>Newly built hospital rooms can't be semi-private anymore for that reason, she said.</p><p>LRMC also has approval to build an in-hospital rehabilitation center on the sixth floor of the existing hospital.</p><p>The rehabilitation unit is projected to cost $11.9 million, just under the cost of the annual lease payment.</p><p>If the money hadn't gone to the lease payment, supporters point out as an example, it could have funded the new unit. Instead, LRMC needs to get more money from donors, reserves and borrowing.</p><p>"Moody's is going to downgrade us someday," warned Hollis Hooks, a broker and former chairman of Lakeland Regional's board.</p><p>The lease shouldn't be based on net payment revenue, he said, calling the terms "a hindrance to the financial viability of the hospital." </p><p>Net revenue is the money LRMC gets before expenses are subtracted. Hooks said the lease should have been a percentage of revenue LRMC has after meeting its operating expenses. The lease has been a long-standing frustration at the hospital, preceding Thompson's arrival, but the combination of increasing payments unless a freeze continues and the other financial pressures have brought it to a near crisis-level, she and Harrell said.</p><p>[ Robin Williams Adams can be reached at robin.adams@theledger.com or 863-802-7558. Read her blog at robinsrx.blogs.theledger.com. Follow on Twitter @ledgerROBIN. ]</p>